Looking for Holiday Cheer? Hard to Find on Wall Street As New Week Opens

Holiday cheer seems a little tough to find on Wall Street as the new week opens. Stocks are down about 17% this quarter and 7% year to date, and weakness appears likely to continue in the short session today.

Key Takeaways

After worst week in a decade, few signs of a rebound

Today’s a shorter session than usual, and market is closed tomorrow

Trading might be thin ahead of the holiday

(Monday Market Open) Christmas week opens without much cheer on Wall Street and few if any signs of a “Santa Claus rally.” After the month we’ve had, many investors would probably welcome a single positive day, never mind a visit from St. Nick.

Before sifting through the smoldering embers of last week’s flameout, it’s worth noting that today is a holiday-shortened session that ends at 1 p.m. ET. Trading is likely to be thin, with many investors already gone for Christmas or perhaps for the year. Volatility is already so high that it likely would be a choppy day even without the expected low volume, so investors might want to consider taking extra care.

The day appears to have a weak tone early on following mixed trading in Europe and Asia. The so-called “risk-off” trade that dominated the last few weeks continued early Monday. Gold and Treasuries ticked higher, while crude pulled back and fell below $45 a barrel after sliding 11% last week. The Japanese yen strengthened, but the dollar eased slightly as some analysts say the government shutdown might be starting to hurt the greenback a little.

There aren’t any big earnings on tap this week, and only a smattering of data (see more below). The major indices have been in free-fall all month, so it’s hard to talk about potential technical support levels. However, one area to watch might be around 2375 in the S&P 500 (SPX), which marks a halfway point between this year’s intraday 2940 peak and the 2016 intraday low of 1810.

There’s not much that the media haven’t already said about last week, but if you have the stomach for it, let’s look one more time at where we stand. The market is coming off of its worst week in a decade, with the major averages down from 6.37% for the Dow Jones Industrial Average ($DJI) to 8.36% for the Nasdaq Composite (COMP). The COMP starts the new week in bear territory, down almost 22% from its all-time high.

U.S. stocks lost about $2.06 trillion in value last week, Barron’s reported. The SPX is down 7.7% for the year, making this the worst year for stocks since 2008 and quite likely the first negative annual stock market performance since 2015.

Some Long-Term Perspective

How should long-term investors consider approaching these tough times? We’ll talk more about that in coming days, but the first step is to try to avoid making any rash moves based on emotion. Hopefully you have a plan in place, and understand that markets can have a bad year or even a bad string of years now and then. Investors with a long time horizon might want to consider simply keeping their heads down and putting long-term goals front and center, rather than closely monitoring every stomach-churning day on Wall Street.

These weeks heading into the new year could also be a good chance to look over your brokerage statements with as little emotion as possible and check whether your allocations are still where you want them. If you’ve had major life changes or are re-thinking of your goals, consider examining your portfolio to see if it still matches your long-term plan.

Can stocks keep falling? No one knows what might come next, and there’s still a lot of bearish uncertainty about key events. The U.S. partial government shutdown looks like it could possibly last a while. There’s no sign of progress in trade talks with China or in the Brexit situation. The Fed still forecasts that it could raise rates a couple of times next year. Borrowing costs are elevated, and some companies have been facing higher input costs. Weak crude prices are punishing the energy sector, and falling rates have financial stocks on the defensive.

That said, it’s not like there’s nothing positive out there. Earnings season starts in a few weeks and most Wall Street analyst estimates look strong for Q4. Holiday shopping appeared pretty good, and consumer confidence remains high—at least judging from recent data. Unemployment is at nearly 50-year lows, and wages are rising faster than inflation. Also, as Barron’s points out, one measure of investor sentiment—the put/call ratio—is at its worst ever, possibly a suggestion we could be in oversold territory. Buybacks are rising, with the SPX down 17% so far this quarter.

These positive factors haven’t really helped the market over the last few months, but they’re out there. However, until we get some sort of answer on the tariff situation, it might be hard to expect any kind of major recovery in the markets.

There won’t be a Market Update tomorrow on Christmas day, so enjoy the holiday and we’ll be back Wednesday morning.

Economic Data on Tap as Year Ends

Economic data look pretty thin this holiday week, but there will be readings on the housing market, including new home sales and pending home sales. (Also, it may be worth remembering that on holiday shortened weeks, trading can be thin which can exacerbate market volatility.)

The housing market has been buffeted by headwinds including rising mortgage rates. Although those have fallen recently, concerns over housing affordability pushed builder confidence in the market for newly-built single-family homes down four points to 56 in December, its lowest reading since May 2015, according to the most recent National Association of Home Builders/Wells Fargo Housing Market Index.

Meanwhile, a weekly survey from the Mortgage Bankers Association showed mortgage applications decreased 5.8% from the prior week. Even though mortgage rates have fallen, more potential borrowers were likely avoiding the market because of financial market volatility and uncertainty about the economy, the group said.

Although headline figures for November housing starts and building permits came in ahead of expectations, they showed little to no growth in single-family starts and permits, reflecting “the impact rising interest rates are having on single-family construction activity,” as Briefing.com put it. Meanwhile, existing home sales in November came in ahead of expectations, but total sales were 7% below the same period in the previous year.

Another report scheduled for coming days is a reading on consumer confidence for December. The U.S. consumer accounts for a huge portion of gross domestic product, and it could be interesting to see whether any of the recent stock market declines have dented sentiment. If it’s anything like the University of Michigan’s Index of Consumer Sentiment, which on Friday showed the final reading for December coming in ahead of expectations, it might show consumers apparently seem less concerned about the market than Wall Street is. Still, it may take one more report cycle for consumer sentiment to take a big hit, if at all, from recent stock market declines.

In one marker of consumer health, Nike (NKE) reported quarterly revenue and earnings per share last week that beat analyst expectations, performance that could be seen as a sign that consumers are healthy, or at least optimistic.

More broadly, retailers have a lot to prove over the next month or so as we wait and see whether a good holiday season translates into strong stock performance. Beyond hitting earnings projections, investors will want to see retailers showing solid margins and offering strong guidance.

Stocks Ended Last Week Sharply Lower

Investors seemed to continue biting their nails Friday on lingering worry over a potential U.S. government shutdown and recent actions by the Fed that seemed to be more hawkish than some were hoping. At some point, the selling seems to have become panicky and may be feeding on itself on continued negative momentum.

Plus, some of the selling could have been related to Friday being a quadruple witching day, which involves the simultaneous expiry of stock index futures, stock index options, stock options and single stock futures.

These ingredients are just the latest to be added to the bearish cauldron that seems to be bubbling up as some investors probably just want to get this year over with. Trade tensions between the U.S. and China continue to percolate, as do worries about Brexit.

With the pressure seemingly coming from all sides, stocks couldn’t hold on to Friday’s early gains, and each of the main three U.S. indices dropped markedly in a style fitting a week that saw steep losses. A nearly 3% loss in the Nasdaq Composite (COMP) pushed the tech-heavy index firmly into bear-market territory. The S&P 500 (SPX) was approaching such a market, and the Dow Jones Industrial Average had its worst week since 2008’s financial crisis, according to CNBC.

Crude slipped again as worries about potentially anemic global demand helped push oil prices lower even as some investors continued to move out of riskier assets. With crude falling, the energy stocks fell again.

But the two biggest S&P 500 sector losses came in communication services and information technology. Closely watched names Twitter (TWTR), Facebook (FB), and Netflix (NFLX) were the biggest losers in the communication services sector while Alphabet’s (GOOG, GOOGL) Google also fell markedly. In the information technology sector, widely held Apple (AAPL) fell more than 3.8%.

Investors have been revaluing technology shares sharply lower in recent weeks amid concerns about the trade war between the U.S. and China, and concerns that regulatory authorities could clamp down on tech companies out of concerns over data privacy.

VIX Fix: During another severe selloff, Wall Street’s fear gauge, the Cboe Volatility Index, unsurprisingly remained elevated. The VIX pierced the 30-handle Friday afternoon and climbed as high as 31.35 before settling in just above 30. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Inflation Subdued:In a week of heightened attention to the Federal Reserve, market participants on Friday got a fresh snapshot of the central bank’s preferred inflation gauge--the core personal consumption expenditures (PCE) price index. That measure, which strips out volatile food and energy prices, rose 0.1% from October to November, slightly below a Briefing.com consensus expectation of a 0.2% rise. That brings the annual core PCE price index reading to a 1.9% increase. So, overall, inflationary pressures seem to continue to be pretty tame. Normally that would tend to soothe market nerves, but this time around it’s juxtaposed against investor reaction to Fed action this week that was more-hawkish than some may have hoped. “PCE inflation continues to run below the Federal Reserve's longer-run target of 2%, which could raise the market's angst level about the Fed being on course to make a policy mistake with further tightening action,” Briefing.com said.

Q4 GDP Growth Seen Slowing: The latest official figure for U.S. gross domestic product came Friday with the government’s third estimate for Q3 GDP. Economic output increased by an annualized rate of 3.4%, slightly under a Briefing.com consensus estimate of 3.5% and a downward revision from the previous government figure of 3.5%. We won’t see official numbers for the first estimate of Q4 and annual 2018 GDP until January 30. But for now we can keep watching the Atlanta Fed’s GDPNow model estimates. The latest forecast, from Friday, is for Q4 to show a 2.7% seasonally adjusted annual GDP rate. That’s down from the previous forecast of 2.9%.

Value Proposition: As we look toward 2019, some investors may be wondering whether the market might be able to recover and reach new highs like it did in 2016, after swooning amid worries about slowing growth. If that is to be the case, it’s likely that value stocks will be a key driver, according to investment research firm CFRA. During the 2016 recovery, value out-performed growth for nine months of the year compared with the historical average of six months, the research group said. CFRA doesn’t think there will be a recession within the next year given recent economic data, a yield curve that is not inverted, positive earnings growth, and strong consumer confidence. “Investor sentiment looks to be the only place where a recession lies,” CFRA said. “As such, we expect investors will continue to gravitate to value over the next several months.”

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